Facts of the Case

The respondent assessee, Angelique International Ltd., made genuine payments amounting to ₹37,87,26,158/- as commission/discount on sales to foreign third parties situated outside India. These non-resident parties did not possess any office or permanent establishment (PE) in India. The payments were made through proper banking channels within the limits prescribed by the Reserve Bank of India (RBI) for services rendered abroad, including procurement of export orders, clearance of goods, scheduling inspections, insurance, and arranging payments.

The Assessing Officer disallowed this entire expenditure by invoking Section 40(a)(i) of the Income Tax Act, 1961, on the ground that the assessee failed to deduct Tax Deducted at Source (TDS) under Section 195 on these foreign remittances. The Revenue contended that the beneficial CBDT Circulars (No. 23 of 1969 and No. 786 of 2000), which exempted export commissions from TDS, had been withdrawn by Circular No. 7/2009 dated October 22, 2009, making the transaction taxable under Section $9(1)(vii)$.

Issues Involved

  1. Whether the assessee was liable to deduct tax at source (TDS) under Section 195 on commission payments made to non-resident agents operating entirely outside India with no permanent establishment in India.
  2. Whether the retroactive application of CBDT Circular No. 7/2009 (which withdrew previous beneficial circulars) by the Revenue to disallow business expenditure under Section 40(a)(i) was legally sustainable.

Petitioner’s (Revenue's) Arguments

  • The Revenue argued that the assessee defaulted by failing to deduct tax at source on the sales commission/discount paid to non-residents under Section 195, thereby attracting disallowance under Section 40(a)(i).
  • It was contended that the payments fell within the ambit of taxable income in India under Section $9(1)(vii)$.
  • The Revenue asserted that since Circular No. 7/2009 had withdrawn the previous beneficial Circulars (No. 23 of 1969 and No. 786 of 2000), those older circulars stood clarified and could not protect the assessee for the relevant assessment period.

Respondent’s Arguments

  • The assessee argued that the foreign agents operated entirely outside India, meaning no part of their income arose or was received within India, making it non-chargeable to tax under Section 5(2) and Section 9.
  • The respondent heavily relied upon the clear mandates of CBDT Circular No. 23 (1969) and Circular No. 786 (2000), which expressly clarified that no tax is deductible under Section 195 from export commissions paid to non-residents for services rendered outside India.
  • It was submitted that all payments were made prior to the issuance of the withdrawal Circular No. 7/2009, and a prospective withdrawal cannot strip away vested reliance during the period the beneficial circulars were actively in force.

Court Order / Findings

The Hon’ble Delhi High Court dismissed the Revenue's appeal, ruling in favor of the assessee. The Court's key findings include:

  • No Obligation for TDS if Income is Non-Taxable: Relying on the Supreme Court judgments in CIT vs. Eli Lilly Co. (India) Pvt. Ltd. and G.E. India Technologies Centre Pvt. Ltd. vs. CIT, the Court held that TDS under Section 195 is only mandatory if the underlying income is chargeable to tax in India. Since the non-resident agents had no PE or office in India and performed services abroad, the income was exempt.
  • Circulars are Binding on the Department: Citing Uco Bank vs. CIT and Catholic Syrian Bank Ltd. vs. CIT, the Court reiterated that circulars issued under Section 119 are meant to mitigate the rigours of the law for the benefit of the assessee and are strictly binding on the Income Tax authorities.
  • Prospective Nature of Withdrawal: The Court completely rejected the Revenue's stance that Circular No. 7/2009 was explanatory. The withdrawal of a concessionary circular can only be prospective. Because the payments were made when the older circulars were legally in force, the assessee was fully entitled to rely on them. Thus, the deletion of the Section 40(a)(i) disallowance by the Income Tax Appellate Tribunal (ITAT) was upheld.

Important Clarification

CBDT circulars that provide concessions or mitigate structural rigours for assessees carry the force of law and cannot be ignored or applied retrospectively by the tax administration to create a default liability. If an underlying remittance to a non-resident is not exigible to income tax in India, the statutory obligation to deduct tax at source (TDS) under Section 195 simply does not arise.

Sections Involved

  • Section 9(1)(i) & Section 9(1)(vii) – Income accruing or arising in India / Fees for technical services.
  • Section 40(a)(i) – Disallowance of expenses for non-deduction of TDS on payments to non-residents.
  • Section 119 – CBDT's power to issue instructions and circulars to subordinates.
  • Section 195 – Deduction of tax at source (TDS) on payments made to non-residents.

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2013:DHC:4849-DB/SKN23092013ITA2802013.pdf

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